How ISAs and pensions can save you tax

Written by yasiradnan94
11 October 2018

Two of the best ways to keep your hard earned money in your pocket are through the use of ISAs and pension accounts.

While it’s clearly a worthwhile endeavour to try to save on your tax liability as much as possible, for small business owners, freelancers, and contractors, it’s especially crucial. Anything that can help keep more of your hard-earned money in your pocket is beneficial. Two great ways to accomplish this are ISAs and pension accounts.


In the 2018/19 tax year, the maximum amount you can contribute to a tax-free Individual Savings Account is £20,000. Each year you can distribute your allowance amongst the different types of ISAs: cash, stocks and shares, innovative finance, or Lifetime ISAs (up to £4,000). The interest you earn in a cash ISA, as well as the income or capital gains earned from your investments in these accounts, is not subject to tax. And best of all, there’s no need to declare interest, income, or capital gains on a tax return at the end of the year.

To understand the savings, let’s compare the tax owed if you saved money in an ordinary savings account.

If you are a basic-rate taxpayer, your income is subject to 20% tax. If you saved the maximum ISA allowance of £20,000 in a normal savings account with a 3% interest rate, you’d earn £600. After tax, your profit is reduced to £480.

If you are a higher-rate taxpayer with a tax rate of 40%, you net only £360, and as an additional rate taxpayer with a rate of 45%, you’d fare even worse – earning a mere £330 after tax.

As you can see, even if you invest in an ISA with the same rate as a normal savings account, you can begin to make significant savings.


Another great way to save tax is by contributing to a pension. Tax relief is available on private pension contributions worth up to 100% of your annual earnings or £40,000, whichever is lower. Additionally, if you haven’t utilised your full contribution allowance in previous years (up to three years prior), you can carry forward any unused balance. Not taking advantage of this allowance leaves a lot of tax savings on the table.

Tax relief is automatic as an employee as your employer takes your workplace pension contributions from your pay before deducting tax. It’s also automatic if your income tax rate is 20% because your pension provider will claim this as tax relief and add it to your pension account for you. This is also known as relief at source and is available on personal and stakeholder pensions as well as some workplace pensions.

If your relief is not automatic, you can still claim it back through a self-assessment tax return or by contacting HMRC if you don’t file a return at the end of the tax year.

In your lifetime, you can save up to £1,030,000 as of the 2018/19 tax year.

Your pension is extremely important during retirement, so the more you can contribute to reach your lifetime allowance, while still adhering to the annual contribution limit, the better.

AJN Accountants

Specialist tax planning for contractors

Are you confused about your options regarding pensions and ISAs? We can help. AJN Accountants are specialist contractor accountants and can help you plan your retirement in the most tax efficient way.

Send us an email for some initial advice – [email protected]

helping you making the right choices

The right ISA account will not only provide you with as much yield as a savings account, but also eliminates any tax owed so you keep every penny you earn. And a perfectly planned pension savings plan will ensure you’re saving the most money tax free for your future. AJN can help you find the right mix of ISA investments and pension contributions that will help you save tax and feel at ease about your finances. Don’t delay – get in touch with us today to see how we can help you.

AJN Accountants are specialists in helping contractors, freelancers and small businesses to save tax and time.

Please contact us for more information:

E: [email protected]
T: 020 3866 8951

Follow AJN Accountants on Twitter for regular updates.

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